The policy-setting Federal Open Market Committee, or FOMC, lowered its target for the Federal funds rate -- what banks charge one another overnight -- by 50 basis points or half a percentage point to 2.5%. That rate is now at its lowest level since 1962.
In a related action, the Board of Governors approved a 50 basis point reduction in the largely symbolic discount rate -- related to emergency Fed loans to banks -- to 2%.
Given the weakened U.S. economy after the Sept. 11 terrorist attacks, many on Wall Street had anticipated such an aggressive Fed move on Tuesday, despite Fed easing just two week ago on Sept. 17.
In its statement, the Fed said: "The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."
The Fed also warned "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." Such comments suggest the Fed isn't closing the door on reducing rates further later in the year, according to Standard & Poor's analysts.
But some on Wall Street were wondering if rate cuts alone will be enough to revive the economy. "All of the major indices are down below where they were at the beginning of the year. It looks like interest rates alone aren't going to do the trick," says Alan Ackerman, senior vice president and market strategist at Fahnestock & Co. "The economy is badly in need of an immediate, economic stimulus package of some significance," Ackerman says.
President Bush on Tuesday said he's nearing consensus with Congress on a stimulus plan that could boost the economy without doing long-term damage, according to news reports.
Despite the gloom pervading Wall Street, A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara, Calif., offered some signs of hope. A recent report on the manufacturing sector, for example, came in better than expected. Plus, the attacks may have crunched the time frame for the bear market that stocks already were in prior to Sept. 11 -- instead of stretching the losses out for a longer period of time. And the sooner the market reaches bottom, the more quickly it can recover.
Moore says that investors, meantime, can stay focused on quality growth companies including those in health care, consumer nondurables like food and beverages, and defense names.
Among the stocks in the news Tuesday, personal computer maker Compaq Computer Corp. (CPQ
) warned of a quarterly operating loss on lower-than-expected revenues. Shares of Compaq closed down more than 3%.
While there was a little knee-jerk "sell-the-fact" dip immediately after the Fed's rate cut, stocks quickly reversed course into the close. The Dow Jones industrial average gained 92.03 points, or 1.04%, to 8,928.86. The Nasdaq Composite Index added 11.74 points, or 0.79%, to 1,492.20. The broader Standard & Poor's 500 Index was up 12 points, or 1.16%, to 1,050.55.
U.S Treasuries closed higher after the Fed announced a half-point cut in the Fed funds target rate, and suggested more cuts may be coming. S&P MMS notes that more talk of fiscal prudence by President Bush supported the long bond ahead of the Fed announcement. While there was a little knee-jerk "sell-the-fact" immediately after the Fed's rate cut, bonds quickly rallied, with shorter-dated Treasuries leading the charge into the close.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index was up 46.70 points, or 0.98%, to 4,832.30. An index of U.K. manufacturing shrank, and growth in housing prices slowed, according to new economic data. In France, the CAC 40 added 40.09 points, or 1%, to 4,044.66. In Germany, the DAX Index gained 18.82 points, or 0.44%, to 4,258.79. Chancellor Schroeder said he sees strong GDP growth in 2002, and called the slowdown in 2001 "temporary."
In Asia, the markets ended higher. The Nikkei gained 164.28 points, or 1.65%, to 10,136.56, led by autos and banks. In Hong Kong, the market was closed for a holiday. On Monday, the Hang Seng surged 349.91 points, or 3.64%, to 9,950.70. By Heesun Wee in New York